If you currently hold investments and assets in your trading company, then these investments and assets could be at risk should your trading company have financial difficulties.

Reviewing your business structure and considering splitting off parts of your business to hold investment activity and assets outside of a trading company can help to minimise risk, prepare for sale and support business growth.

In this blog we will look at why you may decide to hold investments and assets separately from a trading company and things to consider before undertaking this exercise, including tax considerations.

Can you own assets and investment activity in a holding company?

The simple answer to this question is yes. Whilst the purpose of a holding company may be seen as to control another company, business owners are now using holding companies to protect and hold assets and investments such as property, patents, trademarks, intellectual property, stocks and other investment activity separately from trading activities.

Why consider splitting off your investment activities from your trading company?

Splitting off your investment activities or assets from your trading company can achieve many advantages and is worthwhile considering to:

• Protect assets from any issues experienced within the trading company
• Reduce or better manage risk.
• Prepare the company for sale.
• Pass on the company to family members.
• Allow JV partners to separate.
• Separate assets such as property off before disposing of the trading business.

Protecting assets & reducing risk

Reorganising your company structure by creating a new holding company is a common route used to protect various assets, including Intellectual Property, cash and property. This type of reorganisation will protect assets should the trading company have financial issues, go into liquidation or face legal proceedings.

This would mean that you have two companies as follows:

1. The holding company where the assets are held but no trading activity is undertaken.
2. The trading company where the main trade of the business sits. The trading company can continue to utilise the assets, but the trading company no longer owns them.

Holding company vs subsidiary company

Creating and holding assets in a holding company will protect the assets from any issues such as financial difficulties and will protect the assets against any legal claims made on the trading company.

Assets such as property can be transferred into a new subsidiary company of the main trading company, however, this won’t protect the asset against future claims, so wouldn’t be a route we would recommend if your objective were to protect your assets.

Family succession planning

You may want to pass your trading business to children or other family members, but retain the assets, such as property yourself. This may be able to be achieved through a demerger, the first step of which would be to put in place a holding company.

Business sale

If you are planning to sell the business, you may want to sell the trading company but retain the investments and assets. Potential buyers may want the trading company, but not the assets. Separating the trading activity from the investment assets by creating a holding company, prior to selling can ensure that you are better prepared for the sale.

Things to consider before separating your assets

Undertaking any sort of business reorganisation is not a simple process it requires carefully planning and professional advice to gain benefits and avoid pitfalls. The benefits can be significant to both shareholders and the company. Factors to consider will depend on the specific circumstances of the business, the shareholders, and the reorganisation objectives. These factors include things like:

Current and future plans: What are your plans for the business? Consider different asset classes (e.g. property), future sale or employee incentivisation.

Tax clearances: Prior to any changes in a business structure, you will need to get advanced clearances from HMRC to ensure there are no adverse tax implications of the reorganisation.

The valuation of assets: It is critical to ensure assets are valued correctly prior to splitting them off from a trading company.

The solvency of the business: There must be no risk of the company being or becoming insolvent.

The types of assets held: This may affect timescales and the impact of moving the assets.

Effects on other parts of the business: Does the new structure affect things like ownership, share options, business value etc.

What are the tax considerations?

Reorganising and creating a group structure can allow for tax neutral transfers of assets. However, it is important that HMRC clearance is gained before any reorganisation takes place and that HMRC agrees that the transaction is not being undertaken for purely tax avoidance reasons, but for one or some of the reasons above.

Tax considerations when undertaking this type of reorganisation are:

Capital Gains Tax (CGT)

There are Capital Gains Tax considerations when creating a holding company. Such a restructure can trigger CGT for the shareholders. Clearance needs to be requested from HMRC prior to undertaking the changes. HMRC clearance is vitally important to obtain as without this CGT can be payable without the shareholders having physically received any cash.

If HMRC agrees the reorganisation is being undertaken is not for tax avoidance reasons, the new shares would simply replace the old shares, which can also be beneficial for other tax reliefs.

There are various conditions that need to be met in order for the relief to apply.

Stamp duty

Providing certain conditions are met, the holding company can be created without giving rise to a stamp duty liability.

Substantial Shareholding Exemption (SSE)

Inserting a holding company could potentially allow the trading subsidiary to be sold free from corporation tax, under an exemption called the Substantial Shareholding Exemption (SSE).

To qualify for the relief, qualifying criteria must be met as follows:

• only the subsidiary must be a trading company
• and 10% of its share capital must have been held for a continuous minimum period of 12 months in the 6 years prior to its sale.

Provided the conditions above are met, the whole gain on disposal of shares of the subsidiary companies will be exempt. Consideration will need to be given to the subsequent extraction of the proceeds, but if reinvested in new assets, then there shouldn’t be issues.

Dividend management

Any dividends paid by subsidiary companies to holding companies are normally exempt from Corporation Tax. The shareholder(s) can then extract the dividend from this holding company rather than extracting from the trading or multiple trading companies and so this type of group structure can simplify profit extraction and tax planning.

Inheritance tax

The Inheritance Tax (IHT) position for the shares owned by individual shareholders should always be considered before undertaking any form of corporate reorganisation.

Creating a holding company

The new company would acquire the existing company, and the shareholders would receive shares in the holding company this is called a ‘share for share exchange’.

Clearance needs to be obtained from HMRC to ensure the process doesn’t trigger any CGT or income tax liabilities. This must explain the commercial rationale for the changes.

The assets that the shareholders wish to protect would be distributed up to the new holding company, usually by a distribution in specie.

The distributing company must have sufficient distributable reserves to support the transaction, and so seek advice from both a legal/accounting perspective.

Examples of how Barnes Roffe have helped clients

Example #1 – Preparing for business sale

Challenge:

Selling a trading company that held several investment properties.

The shareholders had received an offer to sell the business but wanted to retain their investment properties.

Outcome:

The properties were transferred into a separate company owned by the same shareholders, leaving the trading company to stand alone.

The shareholders are then able to sell the trading company via a share purchase, rather than having to sell the business out of the company. This also made it significantly less disruptive and much more desirable to the buyer, with the added benefit of a higher net proceeds after tax.

Example #2 – Separate premises from trading company

Challenge:

A trading business owns its trade premises from which they operate but has had an offer from a buyer who cannot afford to buy the trade premises as well.

Outcome:

The trading and property activities were separated without incurring a tax liability. Using a ‘demerger’ process there was no corporation tax, capital gains tax, income tax, stamp duty land tax or VAT liability on separation.

The trading company was then sold with the owners retaining the trade premises. The owners were able to claim business asset disposal relief, meaning their first £1m of capital gains were taxed at 10%.  The owners were then able to lease the premises back to the purchaser of the trading business.

Example #3 – Simplifying of business structure to pass the business onto the next generation

Challenge:

Properties with a significant value were used by the trading business but were held in a separate company, creating issues with passing these to the next generation.

Outcome:

A group was formed with a parent company above the trading company and the property company with the result that the value of the shares in the whole group qualified for relief from inheritance tax but still protected the properties in the event of any issues with the trading business.

Summary

Business owners who are looking for ways to protect their business assets sell or pass on their business but not the assets should consider a company reorganisation.

For mor help and advice on reorganising your company structure, protecting assets, family succession or business sale, contact us today.

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